Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

The DOW is useless for anything to do with understanding what stocks have done. The DOW has all the recent great winners like GE, GM, C and BAC. It's too narrow a sample to be a valid measure and it has had an overconcentration of the stocks you hope you don't own.

The S&P is a better measurement for the overall market. At the August 1982 low it was around 102. We're now safely 7 times above that. I wouldn't get too carried away quite yet but it's still early.

__________________The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius

Steve Forbes: And in terms of evaluating markets, and stocks in particular, you have a pretty disciplined formula. So you can say precisely 950 and-- Jeremy Grantham That's exactly right. It may be wrong, but it's precise. And we've had a long history of doing it the way I described, that everything will be normal in seven years. And it's turned out to be quite robust. And probably pretty simple and straightforward-- an effective way of doing it. And right now, what it says is that, since October, global equity markets have been cheap. Not dramatically cheap--not cheap like you and I have seen [in] a couple of markets. 1982, 1974--that was very cheap indeed.
This is merely ordinarily cheap. But it's the cheapest it's been for 20 years. For 20 years, we had this remarkable period when the markets were never cheap. They got less expensive, you know, too, but they were never cheap. And so now, you have this terrible creative tension between, on one hand, they're the cheapest they've been for 20 years.
They're pretty decent numbers. For seven years, we expect seven-and-a-half [percent] real [return] from the U.S., from the S&P. And perhaps nine-and-a-half from EAFE and emerging. These are not bad numbers for seven years. And on the other hand, as historians, we all recognize that the great bubbles tend to overrun.Steve Forbes: Right.Jeremy Grantham And they're not normally satisfied--you can't buy them off by being slightly cheap; they insist on becoming very cheap. So, we've said for several months that we thought this cycle would go to 600 or 800 on the S&P. Eight hundred if it was a mild recession--ho-ho, [we] can throw that one away. And 600 would be quite normal if it was a severe recession like '82, '74, which I think, I don't know if you agree, is pretty well baked in the pie today. It may be worse, but it's probably not going to be much less bad than '74 or '82.Steve Forbes: And so, in terms of the markets today, even though they're cheap, you're going in gingerly, since it could theoretically go down to 600, and given the emotions you get in these things.Jeremy Grantham Yes, I would say two-to-one, by the way, my instinct plus looking at the history books, that it will go to a new low [in 2009]. So this is the problem; we're underweighted still. In an ordinary asset allocation account that has 65% in equities, we have moved up to 55%. So, we're still underweight, even though they're cheaper than they've been, and they're reasonably cheap.
Now what happens? If we throw in the client's money and it goes down, indeed, as I think it will [in 2009], they will complain quite bitterly that we weren't very smart. We thought it was going down, and yet we threw their money in. So that's one kind of regret. And the other kind of regret is that we hang back and the market runs away, the one-in-three comes up and they say, "You told us the market was cheap. You told us that you had these 9% or 10% real return opportunities, and you're still underweight and the market's back up 200 points. You're an idiot."
So, there's no way you can avoid some regret. You have to look at your own personal balance sheet. How much pain can you stand? If you absolutely can't stand a 20% hit, you'd better carry quite a lot of cash, because you're quite likely to get it. If, on the other hand, you're made of steel, you can concentrate on the seven-year horizon and filter money in, and having a lot of cash here is probably a bit dangerous from the other point of view.
But in any case, it's a very personal judgment of risk avoidance and how tough you are under stress. The worst situation that will befall probably quite a lot of people is that they exaggerate their toughness. The market goes down 30% from here to 600 and they panic, dump their stocks and never get back. And that's the worst outcome.

Latest Threads

Social Knowledge Community

About Us

This community was started in 2002 as an alternative to a then fee only Motley Fool. The focus of the discussions is on topics related to early retirement and financial independence. The community is moderated to ensure a pleasant experience for our members.